Two years after the launch of the legal market, California passes the billion dollar tax mark on cannabis

Millions spent on child care, public safety and research, but growth stagnates as regulated industry struggles to be competitive

According to the figures recently published by state, California has raised more than $ 2018 billion in cannabis tax revenue since the industry launched in January 1,03. Most of that $ XNUMX billion in tax revenue , after covering regulatory costs, has been spent on programs such as child care for low-income families, cannabis research, public safety grants and cleaning up public land damaged by illegal cultivation of marijuana.

While industry insiders and advocates are celebrating these numbers, they are also speaking out against stagnant revenues and ongoing layoffs. These obstacles, many argue, can be overcome if regulators make major changes, including pushing the tax rate for cannabis in the state in an apparently counter-intuitive fashion.

In 2016, when Californian voters approved the legalization of recreational cannabis, officials predicted that once the industry matures, it would generate $ XNUMX billion a year in taxes.

Although growth has been slower than expected, and legal operators continue to be affected by the persistence of the illicit cannabis market, tax revenue from cannabis has increasedfrom $ 72,6 million in the first three months of legalized sales in 2018 to $ 172,7 million in the last three months of 2019. If this growth rate continues in this third year, the industry will reach $ 1 billion in annual tax revenue in 2020.

But growth slowed considerably in the fourth quarter of 2019, according to figures released on March 6 by the California Department of Tax and Royalty Administration. The increase of $ 2,6 million, or 1,5%, is the smallest quarter-over-quarter increase in tax revenue since the market was launched. In previous quarters, increases had averaged 15,5%.

"It's an industry that was supposed to be huge, turning into gangbusters with the green rush," said Zachary Pitts, general manager of Ganja Goddess delivery and president of the California Cannabis Delivery Alliance. "It has grown, but it is far from where I think people expected it to be."

The problems, according to industry insiders, remain largely the same as on the first day: Most Californians - three-quarters of the cities and counties of the state - continue to ban retail stores at their borders.

In addition, the federal government continues to say that marijuana is an illegal drug just like heroin. This means that cannabis companies cannot use traditional banks, raise capital like other industries, or write off their spending on federal taxes.

Perhaps most notable is that the state's well-established illicit market is still thriving, accounting for approximately 75% of all marijuana sales. And with high taxes and regulatory costs that make marijuana products sold in licensed businesses 30-80% more expensive than those sold in black stores, many consumers are not turning to the licensed industry.

"Somewhere in the supply chain, we need to cut the cost of doing business," said Jerred Kiloh, chairman of the board of directors for the United Cannabis Business Association trade group.

All cannabis legally sold in California is subject to a 15% excise tax, a weight culture tax and an ordinary state sales tax. In addition, cities and counties can tackle their own taxes, which can be as high as 20%.

Some legislators have introduced bills to remove the culture tax and at least temporarily reduce the excise tax. Similar bills have failed in previous sessions, but are again waiting for this cycle. Supporters of these bills say they would increase tax revenues because licensed stores would see their sales increase if they could set the prices of their products closer to the prices charged underground.

But the state actually increased the industry's tax rate on January 1 to take into account inflation and new market data, with marijuana retailers paying 12,5% ​​more tax while taxes on growers increased by more than 4%.

It is difficult to quantify the direct impact of this increase, said Kiloh, as other factors such as the spraying crisis and uneven law enforcement are also affecting the industry.

In December, for example, state regulators and local law enforcement teamed up to raid 24 unlicensed stores in Los Angeles. In the weeks that followed, Kiloh said that surrounding licensed businesses reported a 25% increase in sales. But after a few weeks, Mr. Kiloh said that these new customers seemed to have evaporated.

The same goes for January, when Kiloh said authorized stores across the state report an average 10% increase in sales, which they attribute to the directory of online marijuana stores Weedmaps who agreed to stop listing illegal shops. But once again, sales fell quickly, and Kiloh said they have stagnated since.

In both cases, Kilosh said the only possible explanation is that these new customers were shocked by the higher prices on the regulated products and resumed their purchases on the illicit market.

Tags : CaliforniaTaxLaw